Clients set to vote with their feet

Some of
Sigma Pharmaceuticals’
smaller customers are considering switching to Sigma’s competitors,
Symbion
and
Australian Pharmaceutical Industries
, following the lead of its major clients Pulse Pharmacy and Chemist Warehouse.

Industry insiders said a number of individual pharmacists operating under Sigma’s Amcal banner group had contacted Sigma’s rivals over the past week amid concerns about the company’s financial woes.

Many smaller customers – mainly individual pharmacists – are shareholders of Sigma. The value of their shareholdings has plunged as the drug and pharmacy group lurched into a financial crisis because of too much debt and competition from other generic drug producers, sending its shares down 47 per cent over the past year to 52¢.

Smaller customers have voiced concerns about Sigma’s history of offering generous trading terms to its biggest customers, mainly through big discounts and credit lines.

The Melbourne-based company is in discussions with its major clients to rein in trading terms which helped the customers to expand but strained Sigma’s finances. Sigma could lose market share if it is unable to strike an agreement soon.

“We see greater risk in the potential for a significant volume of smaller customers to switch away from Sigma," said Deutsche Bank healthcare analyst David Low in a recent note to clients.

“While the major pharmacy chains will invariably compare offers from other suppliers (as they always have) we expect Sigma to retain these accounts."

Several small customers, who declined to be named, said they were considering switching to other drug distributors. But another small customer said on Monday it would not consider switching wholesalers, as it had no problem with Sigma’s service or deliveries of medicine.

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“Unless you’re a shareholder it doesn’t affect you at ground level," the customer said. “It’s traumatic for pharmacists to change wholesalers."

Sigma, which sells generic and branded drugs and owns national pharmacy groups Amcal and Guardian, recently breached its debt covenants.

Wilson Asset Management portfolio manager Matthew Kidman said he expects there will be changes in Sigma management as the company attempts to renegotiate with its key customers.

“The customers and the shareholders are in the same boat," he said. “In the past most of the customers have been given the value gains, but now everyone’s in the same boat. The company has been heading south for a number of years . . . the company needs new leadership."

Market watchers said Symbion or API could be among the companies which could bid for the Amcal brand, tipped to sell for about $20 million.

Sigma must sell $100 million worth of assets by March 2011 under a deal with its banks.

“Ideally someone would come in and recapitalise the business," Mr Kidman said. “There’s still the possibility they will have to raise money."